Out Of Thin Air

By Jerry Haight

At various times while serving in the U. S. Navy on foreign soil, the government paid me and my fellow servicemen in script, which they called MPC's (Military Pay Certificates). We jokingly called it either funny money or phony money (synonymous terms). Being somewhat thrifty, I usually managed to save some of the script to tide me over in case of a monetary emergency, in other words I saved for a rainy day. One day, at about 17:00 hours, a rather innocuous announcement came over the loud speaker that our current phony money would be replaced the next morning by some more phony money. Ostensibly, the move was designed to discourage counterfeiting, and short notice was part of the overall strategy. I remember my not being overly concerned, thinking "that really doesn't affect me". To my chagrin, what the message should have stated was that at 07:30 hours my rainy day fund would be worthless. After the first experience, of the exchange, I stored my rainy day fund in the form of cigarettes rather than funny money. I made sure that just before any exchange, I would use what little funny money I had to purchase more cigarettes for my fund in lieu of script. Other crewmembers of the ship would immediately hit the bars and spend as much of their script as they could so they would not get caught with worthless paper. What never ceased to amaze me was that what was supposed to be top secret, was known by every bar fly and vendor in every   street,  alley, nook and cranny. The only ones not privy to the secret were military personnel (such as I).  


I was reminded of this experience this past week as the Federal Reserve Board – essentially the government's bank - announced it would reduce the value of the American dollar – our money - by $800 billion in an attempt to "stimulate the economy" encouraging  consumer spending and borrowing. It amazes me how few people are aware of the Fed's impending action. This, of course, will fail just as badly as the $787 billion "stimulus" because while it promotes short-term consumption just as the exchange of script (no one wants to be caught with undervalued currency), it  will also foster further debt, and uncertainty in the private sector while penalizing working families, retirees, and especially entrepreneurs who just might, in a stable economy, want to start a new businesses or expand their current ones, and in the right   environment might even add to their workforce. Now, only the few Americans standing to prosper from this decline of the dollar are those having the knowledge, resources and wherewithal to protect their assets.  Just as I wanted to save for "that rainy day" only to find my savings attempt futile, the Fed's action will undermine every saver, be they retirees with IRA's, savings accounts or investors, students saving for college, would be entrepreneurs saving to start a business, or a young family starting out saving for their firsts home.  

Every dollar that is essentially created out of thin air by the Federal Reserve weakens the value of those dollars which are currently held not only by the American people but people throughout the world..  The Fed's actions is tantamount to inflation and undermine the purchasing power of an already vulnerable middle class.  Instead of feeding the federal government's spend-and-borrow addiction, the Federal Reserve needs to protect the integrity of the dollar.  Otherwise, we are pushing the pedal on the road to bankruptcy. What is the difference between devaluation and inflation? Basically none in their result except devaluation is government induced while the causes of inflation are subject to interpretation, both have an equally devastating impact on the things  important to Americans.

It is not like this is a new phenomenon and there is no way out. We saw the same thing occur  less than forty years ago when the  rate of supercharged inflated  went well into double digits with unemployment  and interest rates chasing close behind and caused  abundance of induced shortages in the midst of plenty. Unlike then, we hear economists such as a former adviser to President Clinton predicting the collapse of US dollar with devastating consequence.  By way of illustration, consider someone buying your house, paying top dollar, buying your car, furniture and appliances, then paying you in MPC's just hours before it becomes worthless, and like the young sailor, you also are kept in the dark about the impending event. This is precisely the predicament of our worldwide trading partners who have loaned the U.S. billions of dollars by their investment in our infrastructure and billions more in credit for merchandise and commodities like  petroleum. They are scared of being paid in MPC's (funny money . . or is it phony money?  

Regardless of what we call it, we are about to embark on another economic train wreck. A train whose. wheels are flying apart on disintegrating tracks  while it's engineer is on vacation and it's fireman is drunk.. Good luck to us all.